The Problem With Real Estate

2nd May, 2024

Real estate is driving the Australian economy whilst driving us all mad. If you are not mad, you are anxious or old. In a world where ageism is the new social bias for a career, it's proving advantageous to be old if you own your home and that's unburdened by a mortgage. Do I hear raucous clapping from retirees? No, they are helping to fund their children’s homes whilst their parents are helping to pay the grand kids' school fees. Everyone is stretched, what a circus!

Unfortunately for Aussies we are losing the desire to be different, to really capitalise on our individuality. We’ve become a “one-trick pony” in the pursuit of real estate at all costs. As the Oracle of Omaha, Warren Buffett professes - “the most important investment you can make is in yourself”. He sees real estate quite differently to Aussies and often as unproductive and usually illiquid. Remember carefully that one of the richest people in the world has lived in the same house for most of his life and when I looked at its value in 2019 it was worth about US $660,000. Today Zillow estimates, Buffett's home to be worth US $1,372,200. Still below Sydney's median house price value of $1.6m and only more valuable when converted by currency.

Warren Buffet's House | Image Source: Business Insider

Buffett has pursued a different path to most Australians and it has brought him a rewarding and long life of immense success. 

We crave a tradition which had so much merit to new Australians - Home Ownership. The problem is you have to be a multi millionaire just to get in. Hardly the penniless, three-job working, industrious new Australian ancestor we proudly thank for getting our gene pool out of danger and to this marvellous and safe country.    
    
You don’t need to be a university educated economist to know that if residential real estate prices rocket upwards for 35 years in a row that rents will also rise dramatically yet the daily news tries its best to shock you, that somehow rents will stay down disproportionately to skyrocketing asset prices. Huh! Nor do you need a degree to understand that if interest rates rise by 200% that borrowers will eventually be in trouble. Do you need a degree to know that the cost of living is the second most important issue for Australians? No! Do you need a degree to figure out that not including mortgage payments in the consumer price index will reduce inflation. No! So what’s going on?    

Picture the Treasurer and RBA Governor piloting and co-piloting a plane where every passenger is an Australian and wants to be a homeowner. It must be a Qantas aircraft. Both are navigating the landscape and communicating messages of hope whilst feathering the acceleration through fiscal stimulus. Their first misspoke was that interest rates wouldn’t rise for 3 years. They now crow that interest rates will fall soon and we’ll build more homes in a hurry. We’ll tackle the real culprits Coles and Woolies. No, this is simply a smoke screen, a planned distraction. The plan is that there is no plan and therefore no realistic solutions to the housing supply. Correct me too but aren’t the three tiers of government all heavily reliant on property taxes. Wasn’t NSW stamp duty alone at about $13b annually, well in excess of the entire UK stamp duty. Let’s not expect the land tax alternative scheme to make much headway there, but I digress.    
    
My Dad was a new immigrant, he arrived by boat from Hong Kong having been a child prisoner of war of the Japanese in Shanghai, China. I asked him before he passed away what the solution to this home ownership dilemma was. He was a chartered accountant so the rationale was always going to be prudent. He said to me that the average income and the median house price in Sydney were too far apart. He wanted more information on alternative markets like Brisbane and New Zealand prices where incomes might still be similar to Sydney’s. He eventually concluded that people were living beyond their means. That’s why our next generations are anxious. They can’t afford to live here. That said their parents don’t want them to live anywhere else so the pressure is on. There used to be pressure to get married and then have kids, now it’s real estate.     

I have complete faith in humans adapting and we will see this anxiety fade. It won’t go away but humans will adjust. They will change their plans and real estate won’t be as critical. If I am right over time this may change the way we think about the importance of a home. Abraham Maslow called it shelter, a primary or basic need, like water, food and clothing. Unfortunately we’ve elevated shelter to the self actualisation level of the human pyramid of needs and it is confusing us.    

Maslow's Hierarchy of Needs | Image Source: TW Training

It’s time to resolve the confusion and get on living our lives. We don’t want to be homeless, we need safe shelter but what we don’t need is to wake up each day and go to work praying that we’ll earn enough income to afford the shelter. It’s time to change tack, to invest in yourself, to get creative and figure out different ways to own real estate. I can think of many, I’ve bought real estate with friends, family and with other real estate professionals. It’s when you go alone and buy what you can’t afford that it becomes too hard. In the end though I’m not caught up in the importance of the home. I got off that escalator a long time ago and found a different path.  

"It’s time to change tack, to invest in yourself, to get creative and figure out different ways to own real estate."  

You only have one life. If you get to share it with someone that’s ideal. If you get to enjoy your shelter and feel happy and secure, that’s desirable. It’s a falsehood to think the property owned in perpetuity means forever, it’s a privilege you should work your life for and when that’s over so too is your need and your ownership. Let’s start to look at real estate differently. We can still be passionate about it and it should be part of your investment portfolio but it does need to pay its way not be overfed.     
    
As for us, if there’s a mountain in our way, there are plenty of exciting solutions to get around, under or over it but one shouldn’t develop FOMO and the resulting dysfunction and paralysis it brings.